Woolworths $2 Billion David Jones Deal Bolsters Department Model

Buying 176-year-old David Jones will give Woolworths control of an upmarket retailer in a country that has the world’s highest wealth per adult after Switzerland, according to Credit Suisse. Photographer: Sergio Dionisio/Bloomberg

April 9 (Bloomberg) -- South Africa’s Woolworths Holdings
Ltd. said its A$2.15 billion ($2 billion) agreement to buy
Australian retailer David Jones Ltd. will strengthen its
department store model against global competitors.

This deal will help Cape Town-based Woolworths “play on
the international stage” and “breathe new life” into the
David Jones brand at a time when apparel companies are expanding
in South Africa and Australia, Chief Executive Officer Ian Moir
said on a call with reporters today.

Woolworths will bring down prices at David Jones through
more own-label sales, while introducing a loyalty-card program
and boosting online revenue, Moir said. The merged group will be
one of the southern hemisphere’s biggest department-store
operators, according to data compiled by Bloomberg. Woolworths
already has a majority stake in Australia’s Country Road chain
of more than 470 shops.

“This deal means Woolworths is able to defend itself from
advances from northern hemisphere retailers,” Alec Abraham, an
analyst at Sasfin Securities in Johannesburg, said by phone.
“It’s been doing pretty well in South Africa, but this means it
has critical mass in the southern regions.”

David Jones shares rose by a record 23 percent today to
close at A$3.91 in Sydney, below the A$4 cash offer. Myer Group
Ltd., its main listed department store competitor, withdrew an
all-stock, zero-premium merger proposal first made Oct. 28 when
the target company’s shares closed at A$2.71. Woolworths shares
slumped 7.6 percent to 67.90 rand in Johannesburg, the biggest
decline since March 2009.

Price Premium

The sale, which has been agreed to by David Jones’s board,
is Australia’s largest retail takeover since 2007, when
Wesfarmers Ltd. bought Coles Group Ltd., according to data
compiled by Bloomberg.

The agreement values the target at about 11.1 times the
last 12 months’ A$192.7 million in earnings before interest,
tax, depreciation and amortization, according to data compiled
by Bloomberg. That’s a 13 percent premium to the median
valuation in developed-market retail acquisitions over $1
billion in the past five years, the data show.

“It does look expensive currently, but they’ve obviously
done their sums,” Evan Lucas, a market strategist at IG Ltd. in
Melbourne, said by phone, referring to Woolworths.

Acquisition Funding

Woolworths is “packing the check book away” now, Moir
said, referring to the prospect of making more acquisitions. The
purchase will be funded through a mix of cash, debt and a sale
of new shares, with the value and other details of the equity
raising to be disclosed in a shareholder letter in mid-May, Moir
said.

“Those chains are in a global arms race to open new stores
now,” Caroline Finch, a senior analyst at Ibisworld Inc. in
Melbourne, said by phone. Local retailers in Australia and South
Africa have to work harder because “the H&Ms and Zaras of this
world have been nipping at their heels, taking the attention of
a very fashion-focused consumer,” she said.

Buying 176-year-old David Jones will give Woolworths
control of an upmarket retailer in a country that has the
world’s highest wealth per adult after Switzerland, according to
Credit Suisse.

“The Australian economy is a little sluggish but this is a
strong economy and it will come back,” Moir said. The strong
Australian dollar “creates a natural rand hedge for our
business in South Africa,” he said.

Woolworths was founded in 1931 in Cape Town and took its
name from a U.K. chain, with which it had no connection. It also
isn’t related to Australia’s Woolworths Ltd. supermarkets.

Combined Sales

David Jones, which has seen sales from stores open at least
12 months decline in all but two of the past 13 quarters, now
stands to benefit should spending from higher-end consumers in
Australia rise, Michael Simotas, a Sydney-based analyst at
Deutsche Bank AG, wrote in a Feb. 11 note to clients.

The South African company currently gets about 16 percent
of its revenue from Australia, where sales by Country Road have
more than doubled over four fiscal years to A$706 million in the
year ended last June.

If David Jones and Woolworths had been combined during
their 2013 fiscal years, Australasia sales of 22.6 billion rand
($2.16 billion) would have amounted to about 43 percent of total
revenue, according to a calculation by Bloomberg.

That size will help compete with offshore entrants, Moir
said: “You’ve either got to accept that competition’s there and
compete with it, or roll over and die.”